Article summarising ICAEW’s reaction to the Accounting Standards Board’s proposed brand new standard for ‘public benefit entities’
The planned new Financial Reporting Standard for Public Benefit Entities (FRSPBE) marks a fresh departure for accounting in the sector. Many entities that will be caught by the new standard will currently be subject to a SORP, but many will not previously have been subject to sectorial specific requirements.
By establishing a single set of principles (backed up by the detailed guidance in the SORPs which will remain), the FRSPBE raises the prospect of greater consistency in accounting principles across the public benefit sector. However, despite the great advantage brought by a single new standard it appears that the SORPs will still have some differences in approach.
How have we responded?
In our comment letter ICAEW has welcomed the retention of sector specific SORPs, but we feel that it may be possible to do more to conform them to each other. In addition we ask whether a three layer regime can be avoided by integrating FRSPBE into a public benefit version of FRSME. At the bottom end, more could be done to clarify the boundary between FRSPBE and the SORPs.
One of the major points raised in our response relates to the difficulty of completing the transition within the time scale proposed by the ASB which envisages mandatory adoption in January 2014. Our working party, formed to discuss the proposals, concluded that entities would benefit from an extension of the effective date.
The proposals for bringing donated goods and services into the accounts are the most far-reaching elements of the paper. It is proposed that these would be recognised on receipt, measured at their fair value to the donor. Currently the treatment of these donations does not follow a consistent series of principles and in the case of charities some are recognised on receipt, others in the period of sale and yet others not at all. The FRSPBE therefore brings welcome clarity to this area. However, there are some significant difficulties in measuring these transactions and some real concerns about how the proposals can be implemented in practice.
In many cases the value to the donor may not be an appropriate representation of the value to the entity and we feel that a focus on the useful value that is actually received would be preferable. In the case of second-hand goods donated for resale that value may be replacement cost – a cost that in some cases may be negligible. Cost / benefit considerations are also important here as the cost of complying with the requirements is likely to exceed the informational benefits received for some asset classes.
The FRSPBE also contains a fair value option for concessionary loans, but this may be unnecessary – such loans are likely to be more appropriately measured at their principal value. Special provisions are included to assist in impairment reviews for property held for social benefits; this is useful but the guidance still refers to cash-flows. These may not be the best impairment indicator for assets of this type and it would be better if this was made more explicit in the standard. It is also unclear how to identify property whose primary purpose is the ‘provision of social benefits’
The standard permits the use of merger accounting for certain combinations of entities but excludes situations where there is ‘significant change’. This may be too restrictive. Finally, a specific liability test is set out for funding commitments, it may be better if this was more clearly linked to that already established in FRSME.
A new dawn beckons in accounting for public benefit entities
These proposed changes to accounting and financial reporting in the UK are far reaching and the outcome of these consultations will potentially change the way that charities account and report. Overall the proposals bring welcome clarity and consistency, but there are some areas where further development is necessary.
These proposals and their impact on the Charities SORP will be discussed at our annual Charity and Voluntary Sector Group Conference in September, which includes a key note address by Sam Younger, Chief Executive of the Charity Commission.
Author: John Boulton, ICAEW Financial Reporting Faculty Manager
Charity and Voluntary Sector Group, August 2011
Views expressed in this article are those of the author and may not represent ICAEW policy. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the publisher or authors.